Linear Programming
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Define Linear Programming in banking context.
Mathematical technique for optimal allocation of scarce resources to competing activities using linear equations/inequalities.
What are the four components of any LP problem?
Objective function, decision variables, constraints, non-negativity restriction.
Name one banking application of Linear Programming.
Distributing lending budget across priority-sector, retail, corporate baskets to maximise risk-adjusted return.
What does Certainty assumption mean in LP?
Probability of occurrence of every coefficient is assumed to be 1.0; deterministic environment.
What is a slack variable and when is it used?
Added to ≤ constraints to convert inequalities into equalities for standard form solution.
What is a surplus variable and when is it used?
Subtracted from ≥ constraints to convert inequalities into equalities for standard form solution.
State the Fundamental Theorem of Linear Programming.
If optimal solution exists, it occurs at least one corner point of the feasible region.
Name one key advantage of LP in banking decisions.
Guarantees best feasible deployment of scarce inputs and identifies bottlenecks via slack/surplus variables.
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